EUR/USD reaches lowest levels since spring 2020

Market movers today

Q4 21 GDP figures are released for a range of euro area countries. While Germany's GDP likely declined amid continuing manufacturing bottlenecks and increased consumer caution, Spain and France might have edged out a plus. EU Commission's economic sentiment for January is also released.

In the US, personal consumption data will give more insights about how consumers reacted to the new COVID-19 wave and rising prices in December, after the weak retail sales figures. PCE inflation data for December is also due.

We expect Swedish GDP to have expanded by 0.9% q/q in Q4 21, while NIER's economic survey will likely show easing confidence in January. In Norway, unemployment and retail sales figures are on the agenda.

The 60 second overview

Central banks in focus: Markets continued to digest Wednesday's hawkish FOMC message, with five 25bp hikes now almost fully priced in for this year. US dollar continued to appreciate, with EUR/USD breaking below 1.12 and reaching lowest levels since spring 2020. Market sentiment has remained relatively calm despite the looming monetary tightening, with equities ending the day somewhat lower, but commodities holding on to their early 2022 gains. US Q4 GDP also surprised to the upside, with annualized q/q growth rate picking up 6.9%. While the rise was partially driven by inventory building, private consumption remains strong, supporting the case for tighter monetary policy. While we do not look for new signals from the ECB next week, Fed's more hawkish line makes the meeting more interesting from market perspective given the elevated inflation pressures and increasing divergence between the two central banks. Read more in our ECB Preview - Inflation uncertainty and data dependency, 28 January.

Russia-Ukraine standoff: Yesterday there was a relief rally in RUB as Russia did not rule out further talks with the US over its security demands despite the US written response falling short of Russian demands. The Russian officials indicated that the US and Russia are looking into a new meeting between the two countries foreign ministers next week. If such a meeting will indeed be setup, it will be hard to imagine a Russian move into Ukraine near-term. There were also some media stories that China had urged Russia not to escalate military tensions when the winter Olympics takes place from next Friday until 20 February. This was rebuked by China but given that China is increasingly the most important Russian allied, the two sides may well be in contact over the situation. This would point to diplomatic dialogue being tried out over the next month. We continue to see it as a close call whether Russia will move in military in Ukraine or a diplomatic solution is found. RUB has rallied some 4% and Russian equities have risen over 10% since yesterday.

Commodities: While worries around possible sanctions affecting Russian supply have likely supported crude oil price recently, brent has remained around USD90/bbl this week despite the relief rally in RUB markets and hawkish FOMC. Similarly, while easing from China provides some support, industrial metal prices have held on to their early 2022 gains. We continue to see this as a challenging environment for the Fed, and we eventually expect broad commodity prices to moderate amid Fed tightening and broad USD appreciation.

Equities: US markets closed somewhat lower on Thursday in volatile trading, as investors digested the FOMC meeting. Interestingly, defensives - and not value - was the clear winner, although investors squeezed in a fifth rate hike into the market pricing. Consumer discretionary and bond proxy real estate led the market lower, while utilities and energy ranked among the outperformers. Dow closed unchanged, S&P 500 -0.5%, Nasdaq -1.4% and Russell 2000 in huge underperformance, down -2.3%. VIX moved somewhat lower for the first time since the selloff. Asian markets are rebounding this morning after the sharp selloff yesterday. US futures are also higher.

FI: A strong sell-off from the get go driven by the one-sided hawkish Fed comments on Wednesday night lead to Bunds peaking 5bp higher. After the initial reaction the move gradually faded during the trading session, with Bunds ending the day less than 2bp higher. The BTPs-Bund spread tightened markedly 6bp to 134bp amid still no outcome on the Italian presidential election. The curve flattened markedly, with both the short end higher and the long end lower in yields, in a classical response to the Fed communication.

FX: One can look at this week's price action as a regime shift having taken place in spot EUR/USD: Market confidence has strongly increased in favour of a stronger USD. We continue to forecast 1.08. In RUB, risks appear to have been overdone in the short term: RUB has rallied some 4% and Russian equities have risen over 10% since yesterday.

Credit: Heavy trading in credit where particularly CDS indices were in bad shape, with iTraxx Xover widening 8.4bp, thus closing in 280bp and Main 1.9bp, closing in 58. HY bonds widened 3.5bp and IG 0.5bp.

Nordic macro

Sweden: Statistics Sweden (SCB) releases the Q4 GDP indicator 08.00 CET. Market consensus is for a 1.0 % qoq increase, a tenth above our own forecast. In addition, SCB also releases December LFS, retail sales and household lending, however, all these are of less importance given the GDP outcome. More interesting is the January NIER (KI) survey, which showed declining confidence in all sectors except manufacturing in December. The previous survey also showed very high selling price expectations in retail trade and manufacturing while it was substantially more modest in private services.

Riksbank buys linkers, SEK 0.5 bn each of IL3109 and IL3114.

Norway: In Norway, layoffs have stopped rising since the government introduced support for wages at COVID-stricken businesses before Christmas. We therefore expect seasonally adjusted registered unemployment to be unchanged at 2.3% in January, and the unadjusted rate to rise to 2.6%.

There have been some big swings in retail sales in recent months, but levels are still around 7% above pre-COVID levels. We therefore expect them to come down at some point as the economy reopens again and consumption shifts more towards services, but uncertainty is high in the coming months.